SEC rethinks shorting rules

The Securities and Exchange Commission has backed away from its plan to force money managers to disclose publicly how they’ve “shorted” stocks.

The agency late Wednesday announced changes to a series of emergency rules it put in place beginning Sept. 17 to curb short selling, which has been fingered -- some say unfairly -- as a major cause of the collapse of many bank and brokerage stocks.

As expected, the SEC, under Chairman Christopher Cox, said it would extend its outright ban on shorting of nearly 1,000 financial stocks beyond the scheduled expiration today.

Although the financial system bailout bill now in Congress has no provisions related to short selling, the SEC is tying its ban to passage of the bill: The ban will expire at midnight on the third business day after the legislation passes, the agency said.

If Congress votes down the bailout, the SEC shorting ban will expire on Oct. 17.

Critics note that despite keeping short sellers at bay, the SEC ban didn’t save Washington Mutual Inc. from collapse or stave off the emergency sale of Wachovia Corp. to Citigroup. Many traders say the ban has dampened trading in general in the protected stocks, making them more volatile.

The bigger surprise Wednesday was that the SEC appears to have changed its mind about giving the public a peek at the shorting activities of hedge funds and other big investors.

In a short sale, a trader borrows stock (usually from a brokerage’s inventory) and sells it, either betting on the price to fall or to provide a portfolio hedge in case that happens. If the stock does decline, the trader can later buy new shares to replace the lent ones and pocket the difference between the sale price and the repurchase price.

Short selling is legal as long as investors follow well-known rules. But the SEC has never required disclosure of short sales by individual money managers.

The Sept. 17 rule change ordered managers to start reporting weekly to the agency on significant new short positions in stocks, beginning this week.

The reporting requirement now will become permanent, the SEC said Wednesday, because it intends to write new regulations before the emergency order expires on Oct. 17.

But the initial reports of short positions were supposed to be available on the SEC’s website beginning Oct. 13. Now, the agency says those initial reports “will be made only to the SEC.” A spokesman for the SEC said the commissioners would decide under the permanent rule change “whether and when” to make the data available to the public.

Hedge funds and professional short sellers have howled about the disclosure rules. The Managed Funds Assn., the trade group for hedge funds, urged Cox in a letter on Sept. 21 to keep the information private.

Looks like the hedgies won this one.